Spending cap will ‘strangle’ state services

The Illinois General Assembly passed a tax increase and a cap on government spending this month, but at least one budget expert says the spending cap will strangle public services as costs rise.

The tax increase “won’t come anywhere near” fully funding public services, said Ralph Martire, executive director of the bipartisan Center for Tax and Budget Accountability (CTBA), in a hearing before the Illinois Senate Revenue Committee shortly before the increase passed both chambers.

Signed into law by Gov. Pat Quinn on Jan. 13, the proposal raises the individual income tax two percentage points to five percent and raises the corporate income tax to seven percent, an increase of 2.2 percentage points. It also imposes a two percent annual limit on state spending growth for four years, starting in Fiscal Year 2012 on July 1 with $36 billion. That figure is 16 percent higher than the current fiscal year’s $31 billion in budget appropriations because lawmakers included an increase needed to catch up on previously deferred pension and group health insurance payments, replace money borrowed from special funds and make up for disappearing federal stimulus money.

Martire says the annual average rate of inflation over the past decade was more than three percent, and the state’s increasing pension payments and debt service will consume about half of the two percent cap on spending growth, meaning that state expenditures on public services won’t be able to keep pace with inflation under the spending caps. Inflation is a decrease in the purchasing power of a unit of currency, so even if the amount of money Illinois spends on public services increases, that money will pay for an ever-decreasing level of service.

“…Your spending growth on education, health, human services and public safety – which are nine out of ten dollars you spend on the general fund – will be limited to 0.75 percent [growth] per year,” Martire says. “It will cause, I think, some damage to those service areas.”

Martire says the current level of public service spending, once adjusted for inflation and population growth, actually amounts to five percent less than Illinois spent on public services in 1995.

“This spending cap will ensure that five years from now, we’ll be spending significantly less on education, health, human services and public safety than we did under Gov. [Jim] Edgar,” Martire says, adding that the state could lose between 28,000 and 42,000 jobs because people who work in public service fields are likely to get pay cuts or lose their jobs. Once that happens, they stop spending in their local economies and the negative effects multiply.

Martire says legislators should remove the increasing pension payments from the spending cap or limit how much of the pension payments count toward the limit.

Senate President John Cullerton says the spending cap can be overridden with a three-fifths vote in both chambers, though exceeding the spending cap automatically nullifies the tax increase.

“If we bring in more money because the economy gets better than we thought, and that money is above this spending cap, it goes into the savings account, not the checking account,” Cullerton says, alluding to special funds created by the new law to save extra revenue for things like education and human services. “We can change that [pension] ramp. … It was somewhat arbitrary when it was done initially, and with further pension reforms, perhaps we can even have the cost of the pension system be minimal.”

Meanwhile, a representative from Gov. Quinn’s office says education will remain underfunded if a borrowing bill is not passed soon.

“It is virtually impossible for the state to be able to continue to meet its applications for payment in the next six months, unless we have this infusion of additional dollars to be able to pay the backlog,” said Julie Smith, Quinn’s deputy chief of staff for education at a Jan. 12 hearing before the Illinois State Board of Education. Smith says that the tax increase is a good first step, but more than $6 billion in vouchers still await payment.

“It brings us back to a more hopeful situation in terms of the stability that we’ll be able to provide over the next four years, but it does not provide us with much latitude with respect to growing any programs in state government,” she says. “I think we’re still going to have to look at ways we can tighten our belts and find ways to save.”